4 Critical Observations as Stock Market Churns Higher

By David Fabian  NOV 05, 2013 2:15 PM

Whether markets end up higher or lower is anyone's guess, but here are some things worth noting right now.


It has been a phenomenal year for stocks, and the market continues to churn higher nearly every day. It seems as though the market has a propensity to overcome nearly every crisis that the media can throw at it while reliably grasping at new highs on a regular basis. As a money manager, I am enthusiastic about the outperformance of US stocks and relishing the consistent steady returns. However, as a risk manager I am careful to not get overly exuberant and remember that the rug may be swiftly pulled out from under us when we least expect it.

The recent report that the Vanguard Total Stock Market Fund (MUTF:VTSMX) has surpassed the PIMCO Total Return Fund (MUTF:PTTRX) as the largest mutual fund in the world is a testament to the increasing appetite for risk among retail investors. Bonds are now looked at as an  increasingly dangerous asset in the face of a growing anxiety that the Federal Reserve will soon begin tapering its asset-purchasing agenda. The threat of rising interest rates has capped gains in bond funds this year and sent investors fleeing to the relative “safety” of equities.

Just as bond funds became overly loved in the first half of this year and interest rates fell to unprecedented lows, I fear that the same scenario will eventually unfold for US stocks. There is some level of credibility for the "Great Rotation" out of bonds and into stocks as the Fed eases itself away from the table. However, if you think that money coming out of bonds is going to create a consistent bid in stocks for the foreseeable future, then you might be in for a rough ride.

We are eventually going to hit a bumpy patch that will see US stocks reverse their trend higher and send investors fleeing for the safety of cash or fixed-income securities. This is simply a function of the regular ebb and flow of the market that has created wealth for generations. The key to prospering is preserving your wealth when the tides change.

Right now we are seeing small rotations in index leadership which may be a sign of institutional investors starting to jockey for position before the end of the year. What I think we will see through the remaining two months of 2013 is a push/pull between the latecomers who are chasing performance and the early adopters who are looking to lock in gains on their positions. Every portfolio manager dreams of years when they can lock in 20%+ returns.

Whether we end up higher or lower from here is anyone’s guess, but the following are some observations that are worth noting:

My advice on trading the remainder of the year is to continue to ride the trend while it lasts with the commitment of trailing stop losses to lock in gains. I am not actively adding new equity holdings to my portfolio at this level, but I am continuing to note changes in sector leadership and adjust my watch list accordingly for the next buying opportunity. I will be using any weakness to add to core holdings and rotate into areas of the market that I feel have the best potential for growth in 2014.

I am using that same strategy with respect to income-producing assets as well. High yield is rich right now, but there are still other areas of the market that are offering value in actively managed closed-end funds, preferred stocks, and even select real estate funds.

No matter how you trade the final months of the year, be careful of becoming entrenched in a single bias toward one asset class. Broaden your horizons and look for value and opportunity wherever it may be.

Read more from David Fabian, Managing Partner at FMD Capital Management:

Four Must Watch Trends In Fixed-Income ETFs

How to Play Consumer Discretionary Stocks

The Best ETFs To Navigate Choppy Interest Rate Waters

Twitter: @fabiancapital
No positions in stocks mentioned.